Keywords
Manufacturing firms
Sectoral heterogeneity
Speed of adjustment
GMM
How to Cite
Abstract
This paper examines capital-structure dynamics and the speed of adjustment (SoA) towards target leverage across industrial sectors in India. Using a panel dataset of 549 listed firms from ten industries from 2011 to 2021, long-term debt ratio (LTDR) is modelled in a dynamic partial-adjustment framework estimated with sector-wise panel GMM that includes macro-financial conditions (GDP growth, interest rates and stock-market returns) and firm-specific characteristics (tangibility, profitability, growth opportunities, firm size and liquidity) as controls. The results reveal marked heterogeneity in adjustment behaviour: estimated SoA ranges from about 4% per year in other non-metallic mineral products to over 40% in machinery and equipment, with several other industries showing intermediate speeds. Profitability consistently exerts a negative effect on leverage, supporting pecking-order arguments. In contrast, GDP growth and liquidity generally reduce leverage. Furthermore, firm size and asset growth are associated with higher target debt ratios. Macroeconomic variables, particularly interest rates, matter most for capital-intensive sectors, underscoring the role of external financing conditions in leverage rebalancing. Overall, Indian manufacturing firms move slowly towards their target capital structures, suggesting that adjustment costs and institutional barriers are significant. The observed sectoral asymmetries indicate the need for industry-specific financial policies that lower barriers to leverage adjustment in slower-adjusting sectors while maintaining conservative debt levels in sectors where adjustment is relatively rapid.
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